In this week’s blog from BostonMoneyMan, we’ll explore fixed and adjustable rates and what they mean for borrowers in the short and long term. Read on to learn more and please contact us to schedule a complimentary consultation or get a quote today.
Fixed-rate interest for a mortgage means you’ll pay the same amount in interest as part of your monthly mortgage payment every single month for the entirety of your loan. Fixed-rate mortgages offer a level of security because they allow for homeowners to make long-term financial plans without fear that their mortgage payments will change after a few years. For some, this sort of security is important in creating a stable budget. They’re a great option for first-time homeowners. Typically, they have terms ranging from 10-30 years.
One possible downside to consider with fixed-rate mortgages is that, compared with an adjustable-rate mortgage in its early stages, they may have higher rates. To get a lower interest rate with a fixed-rate mortgage if the market becomes more competitive, you would need to refinance to a new loan.
Adjustable-rate interest changes throughout the life of a mortgage. Adjustable-rate mortgages (ARMs) have a fixed interest rate for a portion of the mortgage term, then rates change on a regular basis. They are more complex than fixed-rate mortgages, with rates that vary according to market fluctuation. They’re less predictable from a budgeting perspective than fixed-rate mortgages, which can be good or bad for borrowers.
Common ARM term options are 5/1, 7/1, and 10/1. This means that after 5, 7, or 10 years, the interest rate will change yearly depending on the health of the market. This can be great if interest rates become more competitive and could be bad if they rise. The interest rate is determined based on the index, an economic indicator that determines how it increases or decreases. There is a cap on how much an ARM interest rate can rise during each adjustment period and a lifetime cap on how much it can increase over the life of the loan, which can protect clients from life-changing increases in rates. In some cases, homeowners choose an ARM, then choose to refinance to a fixed rate after several years.
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If you’d like to learn more about fixed and adjustable rates for mortgages from BostonMoneyMan in San Diego, CA, we would love to help. Contact us to schedule a complimentary consultation and look further at how these different mortgage solutions would fit into your life.